[quote=DWCAP]You are confusing value with money. Alice doesnt have 3million, she has something that someone will give her 3million for. She has to sell the asset to get the money. If the bad earnings come in, and no one will give her 3 million anymore, then nothing happened to the total amount of money, her asset VALUE decreased.
Value isnt money. Value is how much money someone will give you for the object.
Or in the original example, there is 3 million dollars and 1 million $3 shares. If the bad earnings come in, then there is $3 million dollars and 1 million $2 shares. The values changed, not the money. If alice sells, then there is $3 million (2m alice, 1m bob) and 1 million shares (bob) worth $2 each. Nothing was destroyed, Alice prob feels poorer, bob may feel richer, but nothing except ownership has changed. There is still $3million and 1 million shares.[/quote]
Got you DWCAP and Rich….
Sorry – on my phone I couldn’t read all the threads (and was tired from being in an all day Android Programming seminar). You guys are correct. The money supply stays constant, as there is a specific amount of money. As credit isn’t being granted, it’s a non-issue. But the value of the actual asset (the stock) has decreased in value. Thus when assets devalue, the existing actual money supply (especially in this instance where credit gets contracted due to fear by lenders) becomes more valuable. As those with ASSETS have lost the value of those assets, and those with cash (dollars lets say) can purchase assets at a lower value (presumably which will have a more rapid chance to appreciate (vs. their original over-inflated values) cash will become king.
Rich you seem to think that the gov will print as much as necessary to stimulate the economy, and/or make more money available to help prop up asset prices (or I think that is the case you are making) – would this be possible in a spiraling asset devaluation situation?
